Demystifying Digital Assets

This week we welcome to the Intelligent Edge HBG Senior Researcher and HBG Book Club organizer extraordinaire, Angie Stapleton. Angie brought up the idea for this article way back in January because she was so intrigued by cryptocurrencies and their impact on philanthropy, and she has been reading up (and generously sharing her knowledge with the team) since then. It’s fascinating stuff, and if you’re interested in learning more, don’t miss Angie’s webinar – details below. ~Helen

If you’ve been reading the Intelligent Edge blog for a while, you may have heard the HBG Book Club has been on a roll! We’ve recently read The Givers by David Callahan, Capital Without Borders by Brooke Harrington, and Secrecy World by Jake Bernstein. At their core, each of these books is about the inherent relationship between wealth and power, the structures UHNWIs use to conceal wealth, and the ability of these structures to quietly shape the world we all live in.

Perhaps that’s why while reading Digital Gold: Bitcoin and the Inside Story of the Misfits, a tale of the early days of bitcoin written by New York Times reporter Nathaniel Popper, this quote made me sit up in my seat and take note: “You don’t have to try to vote your way into changing the world. If Bitcoin works, then it will change the entire world in a decade, without asking for anyone’s permission.”

With the voices of Callahan, Harrington, and Bernstein deep inside my head, I spiraled. Will bitcoin really change the world without asking permission? Is bitcoin – or more broadly, the idea of digital currency – the answer? Or, will it only exacerbate the current flaws of our financial systems? And, just like that, I was hooked. Thus began my somewhat unintentional, head-first deep dive into the land of digital assets.

Here, I hope to outline a little of what I have learned to help demystify some of the terms and concepts used to discuss cryptocurrency and its underlying blockchain.

Cryptocurrency

There are currently more than 1500 digital currencies in operation. At its core a cryptocurrency is simply a store of value that uses cryptography and encryption (that’s all geeky terminology for really secure coding) to become a medium of exchange (i.e., tradable for other assets). Most operate using a peer-to-peer network, meaning a third party such as a bank is not required for any transaction. Because transactions are skipping the banks, all the middle-men, and the transaction fees in between our normal payment processing systems (hint: there are a lot!), they are very efficient – saving both time and money off every transaction that is made.

New coins are launched via an Initial Coin Offering (ICO). During an ICO, a coin founder writes a white paper which lays out the foundation for how the coin will work; the platform the coin will use, the problem it solves, how tokens will be deployed, etc. You can think of this as the coin’s business plan to investors.

The new coin company then launches an ICO period, similar to an IPO, where investors can buy into the company. They do this in two ways, via Equity Coins, where an investor simply buys the coins to hold in hopes they appreciate in value; or Utility Coins, where an investor buys coins that can later be traded in for services provided by the company. If the coin does not raise enough money via the ICO, then investors simply receive their money back, and the founders go back to the drawing board.

Blockchain (for non-technophiles)

Cryptocurrencies are based on blockchain, a powerful new technology that has the ability to disrupt everything (and, I really mean everything!). Blockchain, simply put, is a historical store of records segmented into blocks (i.e., chunks of information) that are all linked into an immutable, sequential chain. Each block can contain a ledger of financial transactions, contracts, health records… you name it, and it can likely be stored in a block on the blockchain.

That ledger – or chain of information – is then distributed across a decentralized system of computers that are each updated with new blocks at a system-wide specified time. Blockchain can be open, private, or somewhere in between, depending on how that particular blockchain is set up.

Okay, let’s step back….

Think of this like a giant, super-charged filing system and we each have our own electronic copy. Let’s think of a bank. Every person who comes in makes a transaction. Person A deposits $1,000. Person B applies for a loan for a new car. Person C opens a new savings account. If we were using blockchain, we would create a ledger that would record all of these transactions – both the amounts and the times that they occur.

Because we have a lot of transactions in a day, we will set our blocks up in 30-minute increments. So, for 30 minutes, every transaction that happens will be recorded. At the end of that 30-minute period, we’ll time and date stamp that “block,” add it to the end of our blockchain (meaning after all the blocks that came before this one), and then start a new block recording all the transactions for the next half hour.

Because we want to keep them in order, we will include information in each block that indicates which blocks should come before and after the current one. Instead of having our “filing system” in one place, we will all have our own electronic copy that is automatically updated each half hour when a new block is created.

Because we all have the same information in the same order, we can be sure the information is correct. If someone gets a transaction out of order or incorrect (for example, they say Person A above only deposited $500 instead of $1,000), we can correct it because everyone else has the same information (showing the transaction was $1,000) in their block. We can then decide who should be able to view our decentralized, electronic filing system – select teams in our company, the whole company, just our clients, the public at large, etc.

This is all great, but why does it matter?

Well, this is my favorite part…. people invested in cryptocurrencies are making philanthropic gifts with it – YAY! Fidelity Charitable reported that 61% of their contributions in 2017 were of non-cash assets, including $69 million in donations of cryptocurrency (that’s a tenfold increase from 2016!).

We also saw huge gifts coming from both individuals and coin companies alike. In December 2017, a bitcoin millionaire, under the moniker “Pine,” captivated the world when (s)he posted a note to Reddit with plans to give away $86 million via The Pineapple Fund. Completely anonymous, (s)he went on to give around $55 million (the entire value of his/her bitcoin after the price dropped) to worthy causes.

Just last month, coin company Ripple donated the largest gift yet to a single nonprofit, donating $29 million to fund every open request on education crowdsourcing site DonorsChoose.org. That gift alone touched ONE IN SIX schools across America. Of course, we’re also seeing nonprofits use blockchain technology across program areas, creating efficiency in programs that will carry over to how we approach and market our fundraising asks.

The fun part? This is all still so new! We don’t know yet how cryptocurrencies and blockchain technology will take hold. Will it become a front-line use source, used by individuals? Will it just disrupt back-end processes making our current systems more efficient and much cheaper for us all? Who stands to benefit financially and (hopefully!) fill our prospect pools as new donors? And which coin(s) will eventually win out and become the primary digital coins? Wow, the future is an exciting place to be!

Upcoming Opportunity

To learn more about digital assets, blockchain, and their relationship to philanthropy, please join me for “Crypto-philanthropy: Digital Currency in the Social Sector,” presented by the ever-generous and wonderful Apra MidSouth chapter on Friday, May 11th at 12 noon CST. We’ll explore some of the concepts discussed here as well as additional nonprofit examples, future case-uses, a look at individuals who stand to gain financially (i.e., prospect identification), and tips and tricks you can use when you’re researching in this area. Details and registration here: https://attendee.gotowebinar.com/register/8655169007169709570

Additional Resources and Reading:

The Age of Cryptocurrency: How Bitcoin and Digital Money are Challenging the Global Economic Order, by Paul Vigna and Michael Casey